News, thoughts, and insights for financial marketers

Back in July, we wrote about how the recent news of the UK’s departure from the EU would possibly impact the exchange of data between European countries, as well as the world at large. Well, quite a lot has changed since then and what was opaque before is becoming increasingly translucent, so we thought it appropriate to provide an update on whats going on, not just with data, but with a broader scope of the current and projected impacts of the infamous Brexit.

“Passport, Please?”

At the center of the finance industry in the UK is the issue of passporting rights. These crucial provisions allow financial companies to conduct business across all 28 nations in the EU’s common market without having to go through the process of gaining approval from each individual country. Without these rights the financial industry in the UK stands to lose a massive amount of momentum they’ve earned over the past few years and financial giants who call the UK home might start looking for greener pastures. There are a lot of conflicting opinions swirling around this hotly contested issue and the uncertainty and anxiety will certainly remain constant until the Brexit negotiations begin and some serious decisions are made.

On one side of the isle, foreign secretary Boris Johnson has said on record that UK financial firms will not lose their passporting rights and will continue with business as usual when the split finally happens.

When he spoke to reporters in a trip to the US, he said the following regarding concerns over the future of passporting rights:

“It’s very much in the interest of both parties to keep those flows going…”

Mr. Johnson went on to encourage people to be optimistic for the following reasons:

London offers the deepest pools of liquidity, talent and skill for the capital-formation needs of businesses across Europe

An open relationship for goods and services is crucial given the depth of trading between Britain and the rest of the continent

On the other side of the isle, you have Wolfgang Shäuble, Germany’s finance minister, who says if and when the UK leaves, they will be treated as such by the rest of the EU. When discussing passporting, Mr. Shäuble said the following:

“There is no à la carte menu. There is only the whole menu or none.”

Shäuble spoke staunchly and directly to the Financial Times on the issue of passporting and seemed confident in his predictions of the results of the Brexit negotiations between the UK and the EU. He went on to say:

“Without membership of the internal market, without acceptance of the four basic freedoms of the internal market there can, of course, be no passporting, no free access for financial products or for financial actors,”

Splitting the isle and remaining both optimistic and realistic, analysts at Moody’s Investors Service have spoken out against sensational claims of the UK financial industry’s doom following the loss of passporting rights, arguing instead that the loss of these rights would be manageable for most financial entities. The Moody analysts said the following regarding the impact of a loss of passporting rights:

“The direct impact is likely to be modest… The greater impact would be felt through higher costs and diversion of management attention, as the companies concerned restructure, reducing profitability for a time… This is credit negative but manageable. And other critical factors such as capital and liquidity, which are largely determined by global standards, are unlikely to face material changes due to Brexit per se.”

They went on to claim that although they would likely have to give up their passports, the EU’s upcoming Mifid 2 directive on financial services regulation, coming in 2018, would save the UK from much of its looming border troubles. The Midfid 2 specifies that the UK will adopt an equivalent regulatory regime to the EU which could potentially give financial firms another route into the single market.

“We consider that the equivalence provisions within Mifid 2, the complexity of quickly unwinding the status quo and the desire to minimise the initial impact on European-domiciled banks will lead to the preservation of most cross-border rights to undertake business.”

With so many varying opinions flying around regarding this issue, its almost impossible to know how it will all play out. Mark Boleat, the policy chief at the City of London Corporation, had this to say when asked about passporting:

“Passporting is still a crucial issue for financial services firms and the uncertainty is causing real problems for some businesses… In the City many firms are still analysing what impact the loss of passporting will have on them…. For some retail banks it is of almost no real importance. But for the whole of international investment banking and an institution such as [insurance market] Lloyd’s of London it is an absolute necessity… We are making this point clear to policy makers in our ongoing discussions.”

So You’re Saying There’s a Chance

After the news of the “Leave” vote garnering the majority of support in the UK referendum shocked the world, news quickly followed of a large portion of the UK citizenship expressing immediate voter’s remorse. Interviews were conducted with penetent voters, mournful quotes were tweeted and retweeted and the figurative headline in the global zeitgeist read “The UK made their bed, and now they have to sleep in it.”

Although there was a strong image of regret put forth by the media, it still seemed ludicrous to believe that all of the people, or even a large portion in the 52% who voted “Leave” actually regretted their decision. According to a recent poll by British Elction Study, only 6% of those who voted to leave regretted their decision. That 6% doesn’t seem like a ton out of context, but when considering the margin in the original vote was 52% to 48% in favor of Leave, it seems that if the vote was held again the results would easily swing the other way.

This change in voter perception becomes all the more interesting after the news of the British High Court ruling that Prime Minister Theresa May can’t trigger Article 50, beginning the Brexit procedures, without the approval of the Parliament. Suddenly “Remain” voters are perking up, as this ruling acts as a significant win for their long-thought-retired cause. Also, based on the studies on those who regretted their vote mentioned above, it would seem like the majority of the UK now is of the mind to stick around in the EU rather than jump ship.

But, for the majority of those “Leave” voters who didn’t regret their votes, this resistance against their vote is an outrage and disregards the democratic principles on which the referendum was based. Their thoughts are summed up by politician and champion of the “Leave” vote, Nigel Farage in a tweet shortly following the news.

“I now fear that every attempt will be made to block or delay the triggering of Article 50. If this is so, they have no idea of the level of public anger they will provoke.”

Although the future of the Brexit vote is uncertain at this point, if the government loses its case in the Supreme Court, the Parliament is left with an extremely difficult decision: either overturn the referendum vote and stay in the EU, disenfranchising and enraging almost half of the UK populous, or honor the results of the referendum and proceed with Article 50 into the uncertain territories of modern independence.

Keep Calm and Whatnot

Despite initial economic concerns immediately following the Brexit decision, the British economy is refusing to waver under mounting pressures. In fact, it was recently reported that for the first three months following the referendum vote, the UK’s jobless rate was down to 4.8%, the lowest its been in 11 years.

This news, coupled with the economic growth in the UK by 0.5% in the third quart this year, seems to bode well and hopefully quell some of the fears of a post-Brexit economic meltdown. Britain had built up a lot of economic momentum prior to the referendum and has shown steady growth along with a record high 31.8 million people currently employed.

There may be storm clouds on the horizon, however, as certain factors including the jump in factory gate inflation from 1.3% to 2.1% month over month between September and October, the increase in the price of raw materials by 4.6% through September, and the lackluster increase of wages at only 2.3% through September could possibly mean its only a matter of time before inflation starts to infect the economy and make it harder and harder on citizens.

Due to the largely unprecedented nature of the Brexit, as well as the continued resistance to its enactment, making a prediction regarding its outcome wouldn’t be worth a whole lot, especially before negotiations begin at the end of March 2017, assuming nothing monumental happens between now and then. At the same time, a lot has happened in the short 3 months since we last covered the topic and key issues are starting to emerge among the chaos of the situation.

Because of the constantly updating news-cycle surrounding this historic event, we will continue to provide updates on various aspects of the Brexit as they unfold, especially in relation to the UK’s financial industry, but in the mean time you should check out what the top names in the industry have to say about the situation: Brexit: What’s Next?